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Dell Sales Hit a Snag

Disappointing earnings and concerns over support services put Dell in an unfamiliar position of being the target of criticism.

It was an unusual year for Dell Inc. The company that surged over the past few years as many of its rivals stumbled found itself in the unfamiliar position of being the target of criticism.

For the first time since 2001, Dell missed analyst expectations in both the second and third quarters, forcing it to revamp part of its PC business and lay off about 1,000 employees.

At the same time, Dell was beset by complaints surrounding its support services, particularly in its consumer business.

All this has led to calls by some industry observers for Dell to change its ways—supplement its direct-sales model with a channel strategy, and its Intel Corp.-based systems with chips from Advanced Micro Devices Inc.

It also helped fuel more fierce competition from rivals such as Hewlett-Packard Co. and Sun Microsystems Inc., which see a Dell that has been weakened by perceived missteps.

However, Dell executives, while recognizing there were some problems, say the business model is sound and that plans theyve put in place around both products and support will smooth out any wrinkles from the past year.

"Theres some folks who maybe posted a little better improvement over where they were in 2004, but if you look at relative comparisons, on really any metric you like, its hard to compare," President and CEO Kevin Rollins said here in an interview with eWEEK.

"Financial performance, growth, revenue, share, profitability, new product introduction—particularly growth in the enterprise—theres really no one whos done any better than we have. Weve made some stumbles in terms of our relationship with Wall Street, but that really shouldnt have a whole lot to do with our customers."

The disappointing earnings did help fuel the unusually negative press over the second half of the year, as did a few other issues.

Dell officials pointed to problems with faulty capacitors in its GX270 and GX280 OptiPlex desktops as one cause of the third-quarter numbers.

The capacitors—which help store power and regulate motherboard voltage—came from third-party suppliers, and Dell stopped shipping computers with those capacitors. Last month, Dell recalled about 35,000 notebook battery packs that could overheat.

However, Rollins and others said that despite the blips, business is very good and that initiatives in place will address concerns and keep the companys momentum going into this year.

The companys server and PC businesses will closely align with the new technology coming from Intel, including more dual-core chips and features such as on-chip virtualization and security.

In addition, Dell is bulking up its support service to address concerns from smaller businesses and consumers, including a program called TechConnect, in which a Dell technician will take control of a customers computer over the Internet and fix it directly while the customer waits.

That program currently is being piloted with about 2,200 customers, Rollins said.

They also say Dell will continue to push into the more lucrative high-end enterprise space—where officials claim a 40 percent or more market share—through both hardware and services.

The company still expects to grow revenue to $80 billion in the next few years.

Dells financial hiccups have more to do with the companys expectations than with its business strategy, said Brooks Gray, an analyst with Technology Business Research Inc. The company should give financial guidance thats in line with the current market, Gray said.

"PCs still represent a majority of the business, making it increasingly difficult for Dell to meet those historic profit margins," said Gray in Hampton, N.H. Still, "their operating model ... is very strong, the strongest in the industry."

Other industry analysts see a company that is hurting itself by not being flexible in an industry thats constantly changing.

Emerging markets represent the best growth opportunities for PCs, but the direct-sales model may not be well-suited for those countries, and a channel strategy is necessary. In addition, Dell may be missing out on trends elsewhere in the industry, they said.

Charles King, an analyst with Pund-IT Inc., said that while Dell is strong in the Windows server market, its missing out on two other key enterprise trends—Linux and Opteron.

"Dell doesnt have a viable strategy in either of those," said King in Hayward, Calif. "Dell has been very Microsoft [Corp.]-centric. If it became more aggressive about Linux, it would be able to get a bigger piece of the pie."

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